Halliburton (NYSE:HAL), one of the largest oilfield service companies, reported a strong set of Q4 2013 results on January 21, beating market expectations. While quarterly revenues were up by around 4 % year-over-year to a record $7.6 billion, operating margins rose to about 15% compared to around 13.5% a year ago.  The results were aided by strong drilling activity in the Eastern Hemisphere as well as by higher offshore activity and improving efficiencies in the United States. Here is a brief overview of the company’s quarterly results as well as some of the underlying trends that are driving its performance.
Trefis will be updating its valuation model and price estimate for Halliburton to account for the recent earnings release.
North America: Completion And Production Margin Improvements Help Results
Halliburton derives close to half of its revenues from the North American market, and the company saw some improvements in its financial performance this quarter with operating margins rising to about 16.8%, up from about 12.3% a year ago. Some factors that drove the division’s performance include higher drilling activity in the U.S. Gulf of Mexico, as well as better efficiencies on the U.S. land market, where there has been an increasing focus on drilling efficiencies and a shift to multi-well pad operations. ((Seeking Alpha))
Much of the margin improvement (on a year-on-year basis) in the geomarket came from the Completion and Production segment that includes the company’s pressure pumping operations, which had been facing some headwinds over the past several quarters. Margins for the product segment grew from around 11% last year to around 16.5% , driven in part by the company’s initiatives such as its “Frac of the Future” and “Battle Red,” which are focused around improving processes and reducing the costs of fracking. For instance, under the “Frac of the future” program, Halliburton has been fitting its fracking fleet with new equipment such as efficient pumps that can operate on natural gas instead of diesel and solar-powered sand pumps. The improvement in margins is quite commendable given that the pressure pumping product line continues to face pricing pressures as there is still a lot of stacked equipment in the market.
The U.S Gulf of Mexico continued to see strong activity in the fourth quarter, and the average rig count in the region has risen from around 47 in Q4 2012 to about 58 in Q4 2013. While the company does not break down results for the region, it has mentioned that revenues and profits were sequentially higher, aided by higher overall drilling activity and the return of one of its large stimulation vessels to the region.
Eastern Hemisphere Aids International Results As Latin America Remains Lackluster
Halliburton’s international revenues were up by around to $3.82 billion from around $3.54 billion during the same quarter last year. This was largely due to strong activity in the Eastern Hemisphere, although operating income was almost flat at around $619 million due to lower margins in Latin America.
The Eastern Hemisphere, which includes the Europe/Africa/CIS as well as the Middle East/Asia geomarkets, has proved a bright spot for the big three oilfield service companies through this year. Halliburton’s Eastern Hemisphere revenues for Q4 were up by close to 14% year-over-year, while operating income grew nearly 8%. Key drivers of the region’s performance were higher activity in Algeria, improved drilling and offshore wireline activity in the United Kingdom, increased stimulation activity in Australia as well as higher drilling in Malaysia and Thailand. ((Seeking Alpha))
Latin America continued to prove a challenge for the company due to a slowdown in activity in Brazil and Mexico. In Mexico, PEMEX, the country’s national oil company, has been scaling down on integrated project management work on the Southern Alliance 2 project as it prepares for a round of mega-tender projects. However, this is a largely transitory issue and activity is expected to pick up once again after the tendering activity is complete. The oilfield services market in Brazil has also been undergoing some growing pains and the average rig count in the region during Q4 was down by close 20% when compared to last year.  Deepwater drilling activity, which is typically lucrative for oil companies, has seen a slowdown in the country and this has resulted in an oversupply of equipment in the market, leading to lower pricing and margins. Petrobras, the dominant player in the country’s oil industry, has slowed down drilling of new wells in the offshore pre-salt region since it has been witnessing a higher-than-expected flow rate from some of its existing wells  and also because it has been facing some funding issues. ((Reuters))
Outlook For 2014
Going into 2014, we believe that some of the key factors that will positively influence the global oilfield services market include the improving global economy, rising oil demand as well as relative stability in crude oil prices. Halliburton, for its part, expects global drilling and completion spending for 2014 to increase by mid to upper single-digit percentages. The company is bullish on its North America and Eastern Hemisphere operations, and anticipates that it will be able to garner additional market share in both markets, with better margins and potentially double-digit revenue growth. However, the firm expects Latin America to remain challenging owing to the slowdown in Mexico and Brazil. Overall, the company is targeting a double-digit growth in its EPS for the year 2014.
Some of the key trends to watch in the North American market in 2014 will be the increasing shift towards horizontal drilling in the Permian basin (which currently operates nearly a third of all oil-directed rigs in the U.S.) as well as continued focus on well efficiencies, including a shift towards more pad-based drilling as well as more 24-hour operations. In the Eastern Hemisphere, the company expects spending to be largely driven by national oil companies while markets such as Saudi Arabia, Iraq, China and Australia are expected to spearhead growth. Additionally, the company has also been deploying new technologies into the Eastern Hemisphere and this could enable it to improve its pricing power in these markets. Notes: